I have been a CPA for over 30 years focusing on taxation. I have extensive experience with partnerships, real estate and high net worth individuals.
My ideology can be summarized at least metaphorically by this quote:
"I have a total irreverence for anything connected with society except that which makes the roads safer, the beer stronger, the food cheaper and the old men and old women warmer in the winter and happier in the summer." - Brendan Behan
Nobody I work for has any responsibility for what goes into this blog and you should make no inference that they approve of it or even have read it.

Big Government, Congressman Ryan, and Student Loans

Alan Collinge has appeared here several times with posts on the student loan crisis. He just sent me a new contribution with his commentary on the Republican budget proposal as it relates to student loans. I don’t agree with his analysis, but if I had to agree with all of my guest posters all of the time, I would have to write all the posts myself and I have a day job to tend to. It is a great job. This time of year, we get free dinner Monday through Thursday, free lunch on Saturday and free coffee all the time. It does cut into my blogging time though.

One would think that behind the scenes, Republicans are hard at work developing smaller government initiatives in response to overwhelming populist demand, and in keeping with their stated beliefs. Digging into the higher education related elements of Congressman Ryan’s budget, however, reveals something quite different. In fact, it appears that Ryan’s intention with higher ed is to grow government, and grow it significantly. This is couched in a so called “fair value” accounting scheme applied to the federal student loan program that can only be described as a lie to the American people, and a big, fat, painful lie at that.

Here’s the situation: a couple of years ago, President Obama overhauled the nation’s student loan program whereby the lending and guarantor functions (previously performed by the private sector) were taken over by the federal government.

So, the old, “Federal Family Education Loan Program” (FFELP) was subsumed by the federal government. Remember, now, this was lending system that allowed Sallie Mae’s stock price to rise more quickly than Microsoft‘s when that stock was on fire. This was a lending system that garnered Sallie Mae CEO enough cash to make a tender offer on a major league baseball team, and even build his own, private, 18-hole golf course just outside Washington D.C. It is also the lending system that supported an extremely rich network of guaranty agencies, who thrived on penalties and fees attached to defaulted loans.

The old, FFELP system was also extremely lucrative because of subsidies. Interest subsidies paid to the lenders while students were in school, and also when their student loans were in deferment. There were also very lucrative spread subsidies, and other subsidies paid by the federal government to guarantors for various reasons.

Under Obama’s new, Direct loan program, all of this money now goes to the federal government. The Department of Education now makes every nickel of interest (and charges students even more than the FFELP loans did), makes all the money the guarantors previously made on penalty and fee income derived from defaulted student loans (and the fed was already making $1.22 for every dollar paid out on defaulted FFELP loans). The Fed also no longer pays any of the subsidies mentioned above.

So, to say that the federal government is losing money, not making it (and a ton of it) on the new, Direct Loan program would be beyond incredible. It would be a lie.

Yet, this is precisely what the beltway crowd are now claiming, because Congressman Ryan is proposing a change in the Republican budget that uses a new, “fair value” accounting method- which counts money not made by the lending program if it were to charging supposedly “market rates” for it’s loans to borrowers- as a loss! According to “experts” like Jason Delisle at the New America Foundation who is defending the Republican proposal, the lending system is, indeed losing money overall, and this accounting change reflects that.

This is beyond belief and credibility, and raises obvious concerns. First, there is no way on God’s green earth that the new lending system isn’t making money, and a large amount of it. This big, nasty government program thrives not only on interest income and elimination of subsidy payments, but also on the predatory underpinnings of the program, like the absence of bankruptcy protections, statutes of limitations, and the presence of draconian collection powers that make defaulted loans more profitable than healthy ones. Where the lenders and guarantors were making “mad” money under the old program, the federal government is making even more under the new program. No one looking you straight in the eye could disagree with this unless they were lying to your face.

Second, and perhaps most importantly: Why on earth are the Republicans buddying up with big-government champions like the New America Foundation in trying to protect this obvious, shameless, beltway monstrosity? Is this what the rank and file conservative Republicans can expect from their leadership in the House going forward? If so, I recommend strongly that they be immediately replaced, by true conservatives not infected by the bureaucratic, beltway sickness that seems to have enveloped both parties on this issue and others.

If the Republicans, particularly the younger ones on the Hill like Paul Ryan aren’t there to battle government largess, waste, and intrusion into the lives of decent citizens -both rich and poor- what are they good for?

I have two thoughts on Alan’s analysis. One is that to the extent Sallie Mae was profitable due to subsidies from the federal government, its profitability drops out of the equation. You can’t argue that the federal government will be as profitable as Sallie and will come out even further ahead because there are no longer subsidies to pay. More to the point scoring the loans as an expenditure, when you mark them to market will make it harder to make more of them, which might help with tuition inflation. Applying the principle of accounting conservatism (which has nothing to do with political conservatism), the proposal actually seems sound. Hopefully, Allan will weigh in and set me straight.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

There are a couple of problems with market marking in the context of student loans. First of all, private student loan comprise maybe 20% of the total market, and that is probably a high estimate. So to say that the “true” interest rate for student loans should be taken from this very small subset is not valid, particularly given that often, these loans are a last resort for students whose federal loan eligibility has been maxed out (thus relegating them to a higher interest rate). There are a number of other examples of interplay between the two markets that make this sort of “market marking” hugely problematic, but in general, think “Hesisenberg Uncertainty Principle”, and you begin to spot the difficulties.

I could perhaps buy into this if the government were a relatively small, bit player in a large, pre-existing, naturally developed market, but in this case, it IS the market for all intents and purposes, and has always been.

So the question becomes (and this is my second concern) what are the political motivations for this accounting change? This is unclear, but the obvious motivation would be a premise to raise interest rates (and we are hearing whispers of this already).

Another could be to revive the old, MASSIVELY expensive/wasteful FFELP system. I suspect it may be both, particularly given that the New America Foundation editorials on this issue are being published by the National Review (a fact that on its own should send shivers down the spines of libertarians everywhere).

Whatever the case may be. The point of the article remains: The government is making MAD money on federal student loans (particularly compared to the old system), and anyone inside the beltway attempting to claim that the federal government is losing money on the program is lying to us, and I hate being lied to.

These loans are profitible because of the outrageous fees and penalties associated with them. I know of people that were never late but deemed so and had no recourse once Sallie Mae had decided that they were. No day in court was needed under current laws and their wages were garnished with a simple phone call. Private banks loaned money for public and private loans and made money off of both with no risk after they lobbied congress to remove bankruptcy protections. Once protections went away, they lent more and more and raised tuition with each increase in the amount a student could borrow. Why wouldn’t they? They knew no matter how much they loaned a person that the person would have no way out of paying them. If the person later realized that they had overstepped their bounds and couldn’t support a family or found themselves in trouble due to medical bills, etc they had no recourse to get their financial lives straight. Corporations “re-organize” via bankruptcy protections all the time, but apparently that isn’t available to our citizens…BACK TO JOLLY OLD ENGLAND AND DEBTORS PRISON!

Tony, I have been asking myself the same thing for years. My student Loan debt started at 79K in 1997. It is now at 320 thousand. It has quadrupled and due to compounded interest it will balloon to well over 1.5 million dollars by the time I reach retirement age in 23 years It has a fixed 8.25% interest rate.

If anyone doesn’t believe me, use an online compounded interest calculator and run my numbers yourself.

Doubled, tripled, or quadrupled Student Loan balances are commonplace, and obviously some entities and/or people are profiting from all this.

And so I ask now: What was the fundamental ideology behind bankruptcy laws in the first place? And why were they taken away? And why is bankruptcy not restored when, as you indicate, the debt is beyond hopeless for so many?

Why is there no second chance for individual citizens?

Is the whole system so hopelessly out of control that reform is not possible by now?

There seriously needs to be some kind of control on this situation. We really, really, cannot have a nation of slaves chained to financial slavery. Living standards have not increased enough to merit a 511% tuition increase since ’99. That is absolute malarky. Maybe we should subsidize education like we actually give a damn. 1.4 trillion dollar military budget for 2012 and slavery for the citizens. WTF?

… and BTW, I actually make my payments every month. So this comment is not reaction due to my own negligence and lack of responsibility. It comes from understanding that there will be no money to put back into the community or invest for years to come; about 20-30 years to come. It comes from realizing in retrospect that the loans were intentionally crafted to lure me in, while in a naive state of ambition, with the appearance of goodwill behind it but with the intent of creating a human battery out of me. The Matrix, metaphorically, about sums it up.

system is ass-backwards! schools should put student through, then after they grad, and the schools help them get a job, then the schools can get a reasonable garnish of the payroll till they’re square. Schools would keep costs low, would only take students that they think would succeed, and the “loans” would only have to be payed when the grad. is working.